Virginia Democrats’ New Tax Would Punish Small Businesses First

Virginia Democrats are pushing a major state income tax increase that would not stay confined to the wealthy for long. House Bill 188 (HB 188) would create a new 10 percent Virginia income tax bracket on earnings above $1 million, sharply increasing the state’s top marginal rate on that income.

Supporters sell the bill as a narrow tax hike on high earners. In reality, HB 188 would land squarely on Virginia farms, small businesses, and family-run companies that already operate on thin margins.

What HB 188 Does

Under current Virginia law, income above $17,000 is taxed at a flat 5.75 percent rate. HB 188 would add a new top bracket beginning in tax year 2026:

• Income over $1 million taxed at 10 percent

• A dramatic increase in the marginal rate on affected income

• Revenue directed toward public schools, child care subsidies, and the Virginia Housing Trust Fund

The bill is sponsored by Democratic Delegate Kelly K. Convirs-Fowler and is currently under consideration in the General Assembly.

Why Small Businesses Should Pay Attention

Virginia’s tax code does not distinguish between wage income and business income for pass-through entities. That matters because many of the state’s farms and small businesses are structured as:

• Sole proprietorships

• Partnerships

• S corporations

These businesses do not pay a separate corporate income tax. Their profits flow through to the owner’s personal return. A strong year, a land sale, or a one-time expansion can push reported income above $1 million, even when cash flow is uneven and most earnings are reinvested.

HB 188 would treat those business owners the same as salaried executives with stable income, despite the volatility inherent in operating a business or farm.

Farms Are Especially Vulnerable

Agriculture highlights how this tax misses its target. Farm income often spikes in a single year due to:

• Commodity price swings

• Equipment or land sales

• Weather-related insurance payments

Those spikes are frequently followed by lean years. A 10 percent state income tax would penalize farmers for volatility, not for sustained wealth.

Virginia Would Price Itself Above Its Neighbors

Virginia competes directly with nearby states for investment, entrepreneurs, and job creators. Under HB 188, that competition would tilt sharply against the Commonwealth.

If enacted, Virginia’s top marginal income tax rate would rise to 10 percent, far above neighboring states’ 2026 statutory rates:

• North Carolina: 3.99 percent flat individual income tax

• West Virginia: 4.82 percent top marginal individual income tax rate

• Tennessee: 0 percent tax on wage and salary income

These differences are not academic. Business owners deciding where to expand, relocate, or reinvest will see Virginia imposing a tax penalty that its neighbors do not.

CFE's Takeaway

HB 188 is not a tax on abstract wealth. It is a tax on the people who operate farms, build businesses, and create jobs across Virginia. Pass-through businesses would feel the impact first.

Virginia lawmakers should be focused on competitiveness and affordability, not adopting a tax structure that pushes investment and opportunity to other states.